How it works
When you sell a house, you can pocket a $250,000 profit if you are single, widowed or divorced, or a $500,000 profit if you are married, without paying any tax on it.
You only pay the new 20% rate on gains above this exemption, or if you didn't live in the house for at least two of the last five years before selling it. So, if you buy a house for investment purposes or to use as a vacation home, you have to pay the 20% tax on any profit when you sell.
An example
If you are single and make a $350,000 profit on the sale of your house, the first $250,000 of the profit would not be taxed, but the remaining $100,000 would be subject to the 20% rate.
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| $350,000 |
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capital gain |
| - |
250,000 |
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tax exempt |
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| $100,000 |
|
non-exempt |
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| $100,000 |
|
capital gain non-exempt profit |
| x |
20% |
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capital gains tax |
|
| $20,000 |
|
tax due on sale |
 epending on whether you are looking to buy or sell a house, this change in the tax code could have a major impact on your decision.
When you buy
With the new exemption and tax rate, buying a home is an even better investment for most people. What other investment opportunity offers a $250,000 to $500,000 tax exemption on the profit, while also providing a roof over your head?
In the year 2001, the tax rate will drop to 18% for owners who have lived in their homes for more than five years. So, if you are married and buy a house in 2001, and have the good fortune to make a $600,000 profit when you sell it 5 years later, you will only have to pay 18% tax on your $100,000 non-exempt gain, or $18,000 (a $2,000 savings).
When you sell
Since you no longer have to buy a home within two years of selling one to avoid a hefty tax bill, you are free to spend the profit on something else. (A year's vacation traveling the world, starting your own company, a few Armani suits...)
Additionally, if you do choose to buy again, you no longer have to buy "up" (a home of equal or greater value), which means you now have the freedom to downsize to that comfortable little townhouse without the 2 acres of yard work.
The bad news
If you own a million dollar home, have lived in a house for long enough to see the house appreciate substantially, or have purchased a series of houses in which you have accumulated a lot of rollover profit, this new tax may hurt. True, the tax rate is lower than it used to be, but without the rollover, you may have to trade down if you want to buy another house after this one.
For example
If you are single and bought a house 30 years ago for $100,000 and plan to sell it for $1,000,000 today, you will have to pay $130,000 in taxes which means that you will only have $870,000 to buy your next house.
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| $1,000,000 |
|
sales price |
| - |
100,000 |
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purchase price |
| - |
250,000 |
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tax exemption |
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| $650,000 |
|
taxable profit |
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| $650,000 |
|
taxable profit |
| x |
20% |
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tax rate |
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| $130,000 |
|
tax due on sale |
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|
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| $1,000,000 |
|
sales price |
| - |
130,000 |
|
tax due on sale |
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| $870,000 |
|
cash available |
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Information subject to change at any time for any reason.
Copyright 1999, Austin Home Loan, All Rights Reserved
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